The Reserve Bank of India on Wednesday said it will open a special repo window for Rs 25,000 crore to enable banks meet the liquidity requirement of mutual funds.

The window has been opened as mutual funds on Tuesday came under pressure on banks pressing for redemption of their investments from the liquid and short-term schemes.

This sell-off was triggered by the RBI’s announcement on Monday that bank borrowings from its liquidity adjustment facility (LAF) will be capped at Rs 75,000 crore with effect from July 17.

According to G. Pradeepkumar, CEO, Union KBC Mutual Fund, this (special repo window) may help mutual funds tide over the liquidity stress in the markets. Panic selling on account of redemptions and subsequent sharp spike in money market rates are expected to be curtailed.

“The repo window is likely to reduce the volatility and allow the money markets to settle down. Short-term interest rates have surged and fund houses have received large redemptions in their liquid and short-term funds,” he said.

The RBI said the special repo window will be in addition to the repo (to infuse liquidity) / reverse repo (to suck out liquidity) auctions conducted under the LAF and marginal standing facility (MSF) available to the scheduled commercial banks (excluding regional rural banks).

The tenor of the special repo will be three days (excluding the intervening Saturdays and holidays). The rate of interest on the amount utilised under the special repo will be 10.25 per cent.

The first three-day special repo operation will be conducted on July 18 and the second on July 23. Subsequent operations will be conducted at intervals of three days.

Banks making use of the additional liquidity support through this window can seek waiver of penal interest for any shortfall in maintenance of statutory liquidity ratio (SLR) up to 0.5 per cent of their deposits.

SLR is the slice of deposits that banks have to compulsorily invest in government securities. Currently, the SLR is at 23 per cent of deposits.

(This article was published on July 17, 2013)
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